Krugman Says Stimulus Needed as Budget Cuts Harmful for Growth

March 4 (Bloomberg) -- Paul Krugman, a Princeton University
economist and Nobel laureate, said tighter fiscal policy risks
leading to “substantially increased unemployment” and called
for higher government spending to sustain the U.S. economic
expansion.

“The crucial issue right now is, are we going to keep on
cutting spending and derailing this recovery, or are we going to
at least try to spend” the money “that this economy needs,”
he said on the “Charlie Rose” show, according to a transcript
of an interview scheduled to air today on PBS and tomorrow on
Bloomberg Television. He spoke in a joint interview with Joe
Scarborough, a former congressman and host of MSNBC television’s
“Morning Joe.”

Congress and President Barack Obama failed to agree on a
deal to delay spending cuts that started taking effect this
month. The Congressional Budget Office has estimated the
spending contraction may reduce growth by 0.6 percentage point
by year-end.

“We’d be set for a pretty solid” recovery if it weren’t
for the fiscal tightening, Krugman said. “We have an economy
which is suffering from that inadequate demand. And that means
that any kind of spending cut is going to be harmful right
now.”

Scarborough agreed that now isn’t the time to slash
deficits, saying he would prefer to wait until the Federal
Reserve begins to raise interest rates currently near zero.
Still, he said he’s worried that a failure to address the U.S.
debt burden over the long run risked causing a bond-market
crisis.

“I’m not worried about the markets,” Krugman said in
response. Even cuts in “wasteful defense spending” or reforms
to Medicare that are needed in the future are “going to be a
problem for the economy” today, he said.

Krugman, 60, won the 2008 Nobel Prize in Economics for his
analysis of “trade patterns and location of economic
activity,” according to the Royal Swedish Academy of Sciences,
which selects the winners. His work showed how economies of
scale influence trade and urbanization.